The facts

The case involved a coverage dispute under an ERISA-covered plan's fidelity bond, where the surety had reached an adverse coverage determination and the plan or its successor sought judicial review. The dispute turned on the standard of review the court applied to the surety's determination — de novo review, abuse-of-discretion review, or some intermediate standard.

Procedural posture

The case arose on summary judgment, with the threshold question being which standard of review the court should apply.

The issue

The principal issue is whether and to what extent courts should defer to a surety's determination on bond coverage questions:

The holding

Reflecting the modern trend as discretionary clauses come under regulatory pressure, the court applied less deferential review to the surety's coverage determination.

The court's reasoning

The court reasoned from:

  1. Firestone framework.The Supreme Court's 1989 decision establishing that ERISA plan determinations receive de novo review unless the plan grants discretion, in which case abuse-of-discretion review applies.
  2. Discretionary clause regulation.Many states have adopted regulations under the National Association of Insurance Commissioners model prohibiting discretionary clauses in insurance contracts. The reach to fidelity bonds varies by state.
  3. Bond as contract.Where discretionary clauses are not enforceable, the bond is construed under ordinary contract principles with ambiguities resolved against the surety as the drafter.

Takeaway for trustees

For plan trustees facing a coverage denial, the lesson is that the surety's determination is not the last word. Most ERISA bond coverage disputes are reviewable in federal court, often under de novo review. A coverage denial that seems unjust on its facts deserves a second look from counsel familiar with the relevant circuit's standard-of-review jurisprudence.

For underwriting counsel drafting bond forms, the modern jurisprudence around discretionary clauses means relying on broad discretion grants is increasingly fragile. Better practice is to draft bond language that articulates standards clearly enough to withstand de novo review, rather than trying to insulate determinations through discretionary clauses that may not be enforceable.

Rasenack v. AIG Life Ins. Co.
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Salisbury v. Hartford Life & Accident Ins. Co.
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